IPOs and angels – Both often add value to march toward Wall Street exit

Updated Jul. 30, 2009 at 2:11 p.m.

IPOs and angels – Both often add value to march toward Wall Street exit

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By Bill Warner, special to LTW

Editor’s note: Bill Warner writes “The Angel Connection” which is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. - Not much has been reported on the role that angel investors have been playing in initial public offerings. Keeping in mind that venture-backed IPO's are pretty rare today, there has been a history that provides some additional perspective. Take a look at the working report by William C. Johnson and Jeffrey E. Sohl entitled “Initial Public Offerings and Pre-IPO Shareholders: Angels Versus Venture Capitalists.”

The Role of Angels

It is interesting to note that angels have had a substantial participation in IPOs and that 13.4 percent have angels investors as their only outside shareholders. It is not surprising to see that geography and industry are the primary factors that influence these angels, and that the vast majority of them are located in California and Massachusetts, where a large number of venture capital firms are located.

This is a very attractive situation for angels in that they can exit their investments without having been impacted by subsequent venture capital investments that dilute their participation.

Venture firms have to consider many things during an exit event that angels are less concerned with. It's a much easier IPO to execute.

Venture firms are likely to under price the IPO, where angels are much more aligned with insider and other non-venture capital shareholders to maximize the value of the IPO. This should be a strong consideration by management when they make the decision whether or not to go with venture capital investment.

Of course there are major differences in the investment criteria between angels and VCs. Of note is that angel-backed firms are quite interested in companies that are able to take on high levels of debt.

Both Angel and Venture Investment Accelerate IPOs

Whether a company is backed by angels or venture capitalists, the speed to an IPO is faster than those that are not backed by angels or venture capitalists. It says that these equity partners do add value to the companies they invest in.

About the author: Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.

Tags: Venture & Innovation, Opinion Analysis, The Angel Connection

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